How to Get a Breakthrough in Ukraine
The Case Against Incrementalism
In “Trump, Trade, and the Open Skies” (September 7, 2017), Ashley Nunes discusses whether the United Arab Emirates (UAE) and Qatar are playing by the rules of the United States’ Open Skies agreements, the primary trade deals that govern flights between countries. (The United States currently has 123 such bilateral agreements.) Nunes does not dispute that both Gulf countries have provided their state-owned airlines—Emirates Airline, Etihad Airways, and Qatar Airways—with billions of dollars in subsidies but rather argues that the “vague” language of Open Skies means “subsidies aren’t prohibited outright.”
This narrow understanding of the Open Skies agreements, however, betrays its stated intentions. By signing the deals, both the UAE and Qatar agreed to ensure a “fair and equal opportunity” to compete. Furthermore, both the U.S. Department of Transportation and the U.S. Department of State have the statutory authority to “eliminate discrimination and unfair competitive practices faced by United States airlines in foreign air transportation.” This guidance is affirmed in the 1995 Statement of U.S. International Air Transport Policy, which declares that one of the United States’ objectives in international aviation policy is to “ensure that competition is fair and the playing field is level by eliminating marketplace distortions, such as government subsidies.” Nunes’ limited interpretation of the Open Skies agreements ignores context, intent, and ultimately the best interests of U.S. airlines and the hundreds of thousands of people they employ.
The fact is that Gulf carriers have received over $50 billion since 2004, or roughly $3.8 billion per year. This has enabled them to expand their flights to the United States by 50 percent since January 2015. The additional supply, however, has not led to profits; according to a study by GRA, Inc., a consulting firm that conducts analyses for the aviation industry, 19 of the 23 Gulf carrier routes to the United States lost money in 2014. Over half of the routes had estimated loss margins of over 20 percent. These routes are unprofitable because of a lack of passenger demand and an attempt by Gulf carriers to rectify that by offering their tickets at prices well below their costs.
But it is not just the Gulf carriers’ artificially low ticket prices that skew the markets—it is the very existence of the unprofitable routes they operate. U.S. carriers simply cannot compete against these heavily subsidized carriers on such routes. The Gulf carriers are capable of operating unprofitable routes because they are focused on gaining market share and driving traffic to the Gulf.
According to a report from the economic research firm Compass Lexecon, every time a U.S. carrier is forced to cede a route to a Gulf carrier, an estimated 1,500 American jobs are lost. For example, U.S. airlines were forced to cancel their last remaining routes to the UAE, and they have been almost completely driven out of India, the second-most populous country in the world.
Nunes goes on to argue that “the playing field will never be level” because U.S. airlines benefit from tax breaks from the U.S. government, just as other foreign airlines get favorable treatment from their own governments. It is ironic that Nunes focuses on taxes because the Gulf carriers don’t pay any corporate taxes in their home countries. Even more important, Nunes fails to highlight the sheer size of the Gulf subsidies, which are unprecedented in size and scope compared with other state-owned carriers.
Finally, Nunes asserts that “U.S. airlines are offered immunity from antitrust laws, allowing them to collude to keep fares up.” This is a gross distortion of the limited antitrust immunity some U.S. and foreign carriers receive. Limited antitrust immunity allows airlines to enter alliances and codeshare agreements, which benefit consumers by increasing their route options. The U.S. Department of Transportation only grants this limited immunity when it determines that it is in the public interest to do so. What’s more, no such immunity exists for agreements among U.S. carriers as to fares. This means they do not collude to inflate prices. Therefore, Nunes is patently wrong when he claims U.S. carriers “inflate prices to keep them artificially high.” In fact, Department of Transportation data show that fares have significantly decreased in constant dollars since airline deregulation in 1978 and that fares and fees today are on par with 2008 prices.
Furthermore, the United States is not the only country looking to defend its aviation market against the Gulf carriers’ predatory behavior. The Canadian government limits subsidized Gulf carrier service to the country, and as a result, Air Canada now has more service to India than the entire U.S. airline industry. The European Union recently proposed new rules that would allow action against illegal subsidies fueling unfair competition. Although it is unfortunate that these measures need to be taken, the UAE’s and Qatar’s decisions to disregard the rules of free and fair trade have made them necessary.
The administration of President Donald Trump must likewise take action to ensure that U.S. airlines can compete fairly with their Gulf counterparts. Such action involves ending subsidies, ensuring real transparency in their aviation sectors, and ensuring that the market—not governments—drive outcomes. Contrary to what Nunes argues, cracking down on massive, foreign government subsidies would not prevent other foreign airlines from entering U.S. markets. American carriers can and do compete with all types of competitors, small or large, government or privately owned, low cost or luxury. The major U.S. airlines have expressed their unwavering support for the foundation of the Open Skies policies and the doors those agreements have opened for international travel. It is time for the U.S. government to take action to enforce the Open Skies agreements with the UAE and Qatar and to protect U.S. interests, air carriers, and their employees.